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Delaware’s
unclaimed property laws remain in a state of flux. The state’s estimation method
was struck down last June in Temple-Inland, in which a federal
court characterized it as “a game of ‘gotcha’ that shocks the conscience.”
Delaware repealed its unclaimed property law with the enactment of 2017 Del. S.B. 13 and
replaced it with new provisions in February. But the new statutes left an
important item still up in the air: the methods of statistical estimation that
had been one of the major points of contention in the Temple-Inland case. In absence of statutory guidance on the issue,
two Delaware agencies have attempted to fill the void by proposing rules that
appear to ignore or contravene the federal court’s edict.

The
new statute, Del. Code Ann. tit. 12, § 1172(e), requires Delaware to promulgate
rules for use of statistical sampling in estimation of unclaimed property by
July 1, 2017. Both the Delaware Department of Finance and the Department of
State have proposed regulations on unclaimed property that would repeal and
replace the state’s current regulations.

The
proposed new regulations
from the Department of State refer specifically to the estimation method to be
used in Voluntary Disclosure Agreements, while the proposed regulations
from the Department of Finance refer to the audit process for unclaimed
property holders. The rules, if adopted, would provide guidance to holders for
how the state would calculate unreported unclaimed property in cases where the
holder did not have records of unclaimed property to examine. Presumably, these
rules are intended to improve upon the method of estimation that was found to
violate substantive due process in Temple-Inland.

However,
these proposed rules are not without some significant issues. Ethan Millar, a
partner with Alston & Bird LLP and co-author of both Bloomberg BNA
Portfolio 1600-3rd: Unclaimed Property and the Unclaimed Property content in
the Corporate Income Tax Navigator, sums up his objection to the proposed
rules, saying, “I think the most important point to note is that both proposed
regulations still utilize Delaware’s historical method of estimation, under which
Delaware estimates unclaimed property owed to Delaware in years for which the
holder lacks complete records based on unclaimed property owed by the holder to
persons in all states in the base years (i.e., the years for
which the holder does have complete records).”

This
failure to take into account the fact that property is owed by the holder to
owners in other states is in direct contradiction to the court’s ruling, Millar
said. He added that “Delaware ignores
the federal court’s edict in Temple-Inland that such estimation
methodology ‘is contrary to the fundamental principle of estimation,’ ‘created
significantly misleading results’ and that ‘[i]f the property in base years
shows an address in another state, then the characteristic of that property has
to be extrapolated into the reach back years.’ (emphasis added)”

These
proposed rules may seem as though they are ill-advised on the part of the state.
However, Delaware has a strong financial incentive in maintaining the previous
method of estimation in its unclaimed property examinations. “It is very disappointing
that Delaware ignored the one federal court decision that has ruled on this
issue. At the same time, it is hardly surprising given the substantial
revenue implications to Delaware, as the Temple-Inland method would wipe
out almost all escheat revenues to Delaware from the use of estimation (which
are hundreds of millions of dollars per year),” notes Millar.

Problems
with the new proposed rules are likely to lead to more controversy on the
subject in the future, and their adoption and subsequent enforcement remains an
issue to watch.

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